Why coal is once again king

When Teck-Cominco Ltd. agreed to buy Fording Canadian Coal Trust recently for $14 billion US, the deal might have raised some eyebrows among casual market observers.

After all, the purchase price, $82 US a share plus a bit of a Teck Cominco share, is pretty rich compared with Fording's 52-week stock low of $27.39 US, reached last August.

However, what the Teck-Fording deal points out is that, along with rising global oil and gas prices, the fortunes of the world's coal producers are on the rise.

Take a look at the current valuations of some major coal players. This sector was once considered an investment dog, mainly because of increasing concerns over the negative effect on air quality of coal-burning power plants. Such worries weighed heavily on stock prices, with most firms slumping to 52-week share price lows last summer.

Since then, the values of these companies have risen faster than a well-kneaded loaf of bread.

Share price (all figures USD)

Fording

Peabody

Arch

Foundation

Consol

June '08 (year high)

$96.00

88.69

77.40

89.72

119.10

Aug. '07 (year low)

27.39

38.42

27.76

30.87

34.37

The share prices for all these companies reached 52-week highs in June.

In fact, the improved prospects for these firms have moved in lock-step with global coal prices.

On Dec. 21, the spot price for a ton of Central Appalachia coal in the United States stood at $57.70 US on the open market. On July 25, that same 2,000 pounds of coal cost $140 US, a jump of more than 140 per cent.

Soaring oil prices have fueled coal prices as higher crude costs make coal-fired power plants more economical to run. Thus, a number of countries have been seeking to import more coal to satisfy their power needs.

Analysts pointed to rising demand in India and China, a country that is now a net importer of the black rock, as a big reason for this year's price jump.

In fact, many countries still use coal to produce the majority of their electricity.

India

US

Germany

China

% of power from coal

69

50

47

78

Source: World Coal Institute

Besides greater demand, available coal supply has been crimped, mainly because of floods in Australia and power shortages in South Africa.

Thus, experts expect coal demand to continue outstrip available supply for some time to come.

"We are currently in the remarkable situation where the capacity of miners to supply appears to be outweighed by the possible demand of a growing world economy," says a research report by Paterson Securities Ltd., an Australian investment house.